The Shanghai syndrome

It's the world's fastest-growing metropolis - but will the bubble burst? Mary Wilson finds out

Wednesday 9 March 2005 00:00 BST

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Tomorrow at 10.35pm on BBC 1,
Question Time will be broadcast live from Shanghai as part of the BBC's China week, which runs from 7 to 13 March. Adrian Van Klaveren, deputy director of BBC News, says: "China is changing fast and opening up, so this week of special output gives us a chance to reflect on what's happening and what it means for the world."

Tomorrow at 10.35pm on BBC 1,
Question Time will be broadcast live from Shanghai as part of the BBC's China week, which runs from 7 to 13 March. Adrian Van Klaveren, deputy director of BBC News, says: "China is changing fast and opening up, so this week of special output gives us a chance to reflect on what's happening and what it means for the world."

From a property point of view, China was opened up to western investors when it joined the World Trade Organisation in September 2001. Since then, foreigners have been allowed to buy property in the country and, with economic regulations relaxed, it is relatively simple for Westerners to own a property, obtain a mortgage, and receive rental yields and capital gains.

Shanghai, on the east coast of China, is the fastest growing city in the world with a buoyant property market. Since 2001, property prices have been increasing - by 15 percent in 2002, around 22 per cent in 2003 and up to 25 per cent in some areas in 2004.

"There has been very, very hot interest in China with most investors looking at key coastal cities - Beijing and Shanghai," says Albert Lau, the managing director of Savills' Shanghai office. But although prices are surging, property values in Shanghai are still considerably lower than other major cities - about seven times less than in London or New York. "There is talk of the bubble bursting, but in the long term, real estate values are still undervalued. I think that prices will continue to rise in 2005 and 2006," he says.

Shanghai is divided by the Huangpu river and is an extraordinary place to live. "It is radically different for different people," says Alfie Spencer, an undergraduate at Cambridge, who spent his gap-year in China and was enthralled by the country.

"On the eastern side is Pudong, the new hi-tech financial district, which was still paddy fields in 1990. On the western side, there is the old colonial French quarter, which has French-style buildings and wide boulevards, the English quarter with its little winding streets, an area with high rises like Manhattan, and another area where there are the older traditional Chinese buildings. It's also incredibly rich, which takes some people by surprise. If you walk down one of the main streets in the French district, it is unbelievable how expensive everything is."

Shanghai has a metro system which is amazingly efficient and ridiculously cheap to use. Where it used to take one hour 25 minutes to get from the airport by taxi, it now takes 8 minutes by high-speed train. And bicycles, which used to be everywhere, are now banned from the major streets because they have become too dangerous. Development is happening everywhere - residentially and commercially - at a huge rate of growth. "Investors look for something that is good quality and in a prime location, which guarantees you long-term security," says Lau. He says that three-bedroom apartments sell for an average of US$3,500 per square metre. In a very popular area of Xintiandi, next to the commercial area, there are apartments for sale for around US$4,000 per square metre, which equates to £355,000 per unit - not bad for a three bedder in a central city location.

In The Emerald Gardens, Savills is selling luxury villas at a development on the eastern side of the river, with communal swimming pool, tennis courts, leisure facilities and green spaces, where prices for a four-bedroom house range from around £555,000 to £833,000.

"The Chinese government is adamant that Shanghai will be one of the major players in the international business world," says David Cunningham, MD of Shanghai Vision. "There is massive investment in the underground and other infrastructure, as they reach their goal for the year 2010 - the city of the 21st century. In fact, it has been said that there are more cranes in Shanghai than anywhere else, as it's officially the fastest growing metropolis on the planet."

The population in Shanghai increased by 3 million to more than 20 million in 2004, the Chinese Grand Prix is set to continue for a minimum of seven years and China will be hosting the World Expo in 2010 and the Olympics in 2008. "These events will really bring the area to the forefront of the world's attention and the cities have been working incredibly hard to ensure that they put on a good show," says Cunningham.

So popular is Shanghai at the moment that Shanghai Vision booked its stand at London's recent Homebuyer Show, to sell its most recent project, The Talent Studios - a new development close to the historic Peak Park. But it had to go empty-handed.

"We sold all 60 apartments, two weeks previously, in four days, but we are hoping to be able to market a second block at the same development," says Cunningham. Prices at the development went from around £103,000 for a two-bedroom apartment. The company only deals with developments near a metro or by a park, and offers a rental guarantee for three years of around 6.5 per cent net, which should be self-financing.

However, there is so much building going on that when the rental guarantees run out, there is a chance of there being an over supply of property - and then it might not be so easy to find tenants. Investors must be aware that the bubble might burst, if not this year, in a few years to come.